In Depth

Canada's Islamic stock index: Finding harmony between religion and investing

S&P, a New York-based credit agency and index company, has a series of Shariah-based measures linked to various equity exchanges around the globe, and the Toronto Stock Exchange asked S&P to come up with a Canadian variant.

It has been 20 months since Standard & Poor’s introduced its Shariah stock index into the Canadian market.

And, as the acceptance of this stock measure grows, so might the notion that – in this instance anyway –business and religion can mix.

Similar to any other stock index, the TSX Shariah bounces around at the whims of traders and in response to changing business and economic conditions.

But, generally, the index – which is made up of the stocks of firms that fit within the tenets laid out in the Qur’an, the Holy Book of the Islamic religion – has gained in popularity.

"We have received strong interest from the industry in the index as a benchmark," said Abigail Etches, director, business development for the Canadian index arm of Standard & Poor’s.

As late as Dec. 17, the TSX Shariah index posted a volume of almost 100 million shares traded. Thus, the certificates of the companies that constituted the index have been changing hands at a greater pace than, say, late 2009.

Back then, the volume underscoring the TSX Shariah index hovered in the 20-to-30-million share range.

Likewise, the value of the index has risen about 25 per cent by the end of December 2009 versus the measure’s year low.

Of course, trading in the underlying shares might not indicate the relative popularity of an index.

Indeed, some industry watchers dispute whether the Shariah benchmark has picked up in acceptance.

"This index has been very quiet," said Jeff Gareau, a financial advisor with No Interest Investments, a Mississauga, Ont.-based financial company specializing in investing according to Islamic criteria.

Still, after a couple of years, the TSX Shariah index remains one of the most interesting vehicles for measuring one’s investments.

A kind of ethical investing index

In order to become compliant with Islamic religious code, the TSX's new index — the S&P/TSX 60 Shariah — excludes companies that engage in activities prohibited by that religion, such as gambling and adult entertainment. Companies involved in the production of such products as liquor, tobacco and pork are also excluded from the religious index.

There are 25 stocks in the Canadian Shariah index, including drug maker Biovail Corp. and cheese producer Saputo Inc.


To be compliant with Islamic law, qualified investments cannot generate significant profits from interest-generating activities, they must be conservative in their financing activities and they cannot be made in certain prohibited industries, according to Gareau.

Thus, people looking to put their money into Shariah-qualified equities must generally avoid firms that are engaged in the following sectors:

  • Tobacco.
  • Alcohol-related consumer products.
  • Pork-related products and businesses. 
  • Entertainment generally related to gambling and adult entertainment.
  • Interest-generating activities.

The last category usually prevents Muslim investors from holding stocks in banks and other financial service firms that rely upon lending money for the majority of their earnings.

In addition, Islamic law prevents believers from putting money into companies that are financed in a risky manner. Under this provision, companies need to have:

  • A total debt-to-asset ratio that does not exceed one-third.
  • An accounts-receivable-to-total-asset ratio of less than 45 per cent.
  • The portion of cash plus interest-bearing securities compared to the company's market capitalization cannot exceed 33 per cent.

The S&P/TSX Shariah 60 index is designed to give Islamic investors, especially ones in other countries, a way of comparing how Shariah-compliant investments in Canada would fare versus Shariah stocks in other countries, or compared to the general TSX index, said Alka Banerjee, vice-president of global equity in Standard & Poor's index division.

"The new index will create new opportunities for Islamic investors to benchmark their Canadian investments, and for asset managers to create new investment products serving the Islamic community," she said in a company statement at the time of the index's launch.

Islamic-compliant investments receive the same tax treatment as equities in other indices, according to Gareau.

"They are treated no differently than conventional investments," he said, so they can be held in a registered retirement savings plan (RRSP) or registered education saving plan (RESP).

Other faiths

While Standard and Poor's does not produce any other indices based upon religious rules, other faiths have designed their own investment vehicles.

In December, U.S.-based FaithShares Advisers LLC launched a trio of exchange-traded funds (ETFs) targeting Christians, including a fund specifically for Lutherans and another for Baptists.

"Each of our funds will include 100 stocks of large, well-known companies, but specifically exclude those considered to be objectionable industries by a specific denomination," said Thompson Phillips, president of Oklahoma City-based FaithShares.

Among the ETFs holdings are Starbucks Corp., retailer Nordstrom Inc. and Motorola Inc.

Mirroring the market

While these types of indices and mutual funds might make the faithful happy, some analysts have questioned whether they can deliver solid portfolio returns.

Specifically, one criticism of religion-based indices and mutual funds is that they restrict the potential stock issues that can be held, and thus lower the portfolio's possible return while boosting its volatility. Exposure to a wider range of stocks can help soften market swings that hit specific sectors — in larger indices, each stock makes up a smaller portion of the index. Hence, the price movement of any one stock will move the overall index a smaller amount than it would in an index with fewer stocks. That is why stock professionals watch the S&P 500 index to get a measure of market trends.

Another factor that potentially compounds this problem for Shariah investors is the fact that Islam prohibits involvement with firms that profit by lending money and receiving interest payments. Thus, the S&P/TSX 60 Shariah index does not count shares in Canada's well-considered banking sector, which is traditionally less volatile holdings that can act to reduce stock swings due to changes in world commodity prices.

Despite these criticisms, in practice Canada's Shariah index tends to mirror the TSX's overall results.

Alka Banerjee, vice-president of global equity in Standard and Poors index division.
Although the index started in May 2009, if you calculate the returns of its basket of stocks going back to January 2009, it generally out-performed the overall exchange in the first half of the year. From July to December 2009, the TSX posted only a slightly higher return than the TSX/S&P 60 Shariah.

Overall, the smaller Canadian Shariah index movements tracked the TSX's overall changes almost exactly during 2009, Banerjee said. Its return was also just marginally behind that of S&P's global equity index.

"In general, the Shariah index follows the overall index very closely," she said.

No Interest's Gareau agreed, noting that for his company's Shariah funds, "We only consider the top 100 liquid stocks throughout the world. This actually makes the fund less volatile than even some of the core equity funds that utilize banks."

In the end, Canada's Shariah index is there because investors wanted it, Banerjee said. "We're completely agnostic as to the politics at-hand. [The index] was not driven by catering to one group over another. There was simply a strong demand for this."